Financial Statement Analysis Every Ratio Tells a Story
Financial Statement Analysis
Every Ratio Tells a Story
Financial Statement Analysis
• Financial statement analysis can be conducted at the company, segment or divisional level.
• At the company level, the purpose is usually an investment or lending decision.
• At the segment or divisional level, the purpose can be performance evaluation, a funding decision, or an acquisition or divestiture decision.
Types of Financial Statement Analysis Tools
• Account-by-account trends over time • Percentage of individual accounts to an
aggregate total– Such as income statement items to
revenue or COGS
• Ratio analysis
Account-by-account trends over time
2003 2004 2005 2006 2007
Revenues(billions)
percentage increase
$4.1
24%
$5.3
30%
$6.4
20%
$7.8
22%
$9.4
$21%
Starbucks
Comparison of Individual Accounts to an Aggregate Total
2007 Barr Labs Pfizer
RevenuesCOGSGross ProfitR & DS.G.&A.OtherIncome before taxes
100%47%53%10%31%
4%8%
100%23%77%17%32%
9%19%
Financial Ratios
• Liquidity ratios• Long-term solvency ratios• Profitability ratios• Ratios using stock price
Liquidity Ratios
• Current Ratio• Quick Ratio• Days Accounts Receivable• Days Inventory• Inventory Turnover
Current RatioAssets Liabilities & Equity
Cash & equivalentsAccounts receivableInventoryOther current assetsCurrent AssetsP.P.&E.Other assets
Total assets
Accounts PayableOther current liabilities
Current LiabilitiesLong-term debtTotal liabilitiesEquity
Total liabilities & equity
Current Ratio
Microsoft2007(billions)
Current Assets
Current Liabilities=
$24
$40= 1.7
Quick RatioAssets Liabilities & Equity
Cash & equivalentsAccounts receivableInventoryOther current assetsCurrent AssetsP.P.&E.Other assets
Total assets
Accounts PayableOther current liabilities
Current LiabilitiesLong-term debtTotal liabilitiesEquity
Total liabilities & equity
Quick Ratio
Enron1999(billions)
Cash & cash equivalents + accounts receivable
Current liabilities=
$6.7
$3.8= 0.57
Days Accounts Receivable
Macy’s Inc. 2007
(millions)
Average net accounts receivable x 365
Net sales=
$26,313
(463 + 517)/2 x 365
= 6.8
Days Accounts Receivable
Timberland 2007
(millions)
Average net accounts receivable x 365
Net sales=
$1,436
(188 + 204)/2 x 365
= 50
Days Inventory
Hewlett-Packard 2007(billions)
Average inventory x 365
Cost of goods sold =
$63.4
($8.0 + $7.8)/2 x 365
= 45
Inventory Turnover
Hewlett-Packard 2007(billions)
Cost of goods sold
Average inventory=
($8.0 + $7.8)/2
63.4= 8
Note: 8 x 45 = 360 days
Long-term Solvency Ratios
• Equity-to-Assets• Equity-to-Debt
Equity to AssetsAssets Liabilities & Equity
Cash & equivalentsAccounts receivableInventoryOther current assetsCurrent AssetsP.P.&E.Other assets
Total assets
Accounts PayableOther current liabilities
Current LiabilitiesLong-term debtTotal liabilitiesEquity
Total liabilities & equity
Equity to Assets
Apple 2007(billions)
Shareholders’ Equity
Total Assets=
$25.3
$14.5= 0.57
Equity to DebtAssets Liabilities & Equity
Cash & equivalentsAccounts receivableInventoryOther current assetsCurrent AssetsP.P.&E.Other assets
Total assets
Accounts PayableOther current liabilities
Current LiabilitiesLong-term debtTotal liabilitiesEquity
Total liabilities & equity
Equity to Debt
Apple 2007(billions)
Shareholders’ Equity
Total Debt=
zero
$14.5= ∞
Profitability Ratios
• Return on Assets (ROA)• Return on Sales (ROS)• Return on Equity (ROE)• Earnings per Share (EPS)
Profitability Ratios• Return on Assets (ROA)
net income ÷ average total assets• Return on Sales (ROS)
net income ÷ net sales• Return on Equity (ROE)
net income ÷ average common equity• Earnings per Share (EPS)
earnings available to common shareholders ÷ weighted average common shares outstanding
Southwest Airlines
• Return on Assets (ROA)$499 ÷ $13,732 = 3.6%
• Return on Sales (ROS)$499 ÷ $9,086 = 5.5%
• Return on Equity (ROE)$499 ÷ $6,562 = 7.6%
• Earnings per Share (EPS)$0.63 per share (from the income
statement)
2006
Market Tests
• Price-Earnings Ratio• Market to Book
Price Earnings Ratio(earnings multiple)
Apple 2007
Share price
Earnings per share=
$4.04
$111= 27
Market to Book
Apple 2007
(billions)
Market value of all shares outstanding*
Book value of common equity
=$14.5
$74.5= 5.1
* Most easily obtained from the first page of the 10-K